Judicial vs. Non-Judicial Foreclosures – How Do They Affect You? - If you’re familiar with the real estate industry, there's a good chance you know what a foreclosure is. But what you may not realize is that there are two types of foreclosures, and both can have a big impact on how quickly inventory is cleared out in a specific housing market.
Some states have a judicial foreclosure process – meaning that after a bank seizes a property from a delinquent borrower, it must go through a series of lengthy court proceedings before the home can be resold to a new homeowner. On the other hand, states with a non-judicial foreclosure process allow banks to resell the distressed property without ever having to go to court.
The judicial process was designed to protect homeowners. These court proceedings are in place to make sure that lenders have followed the law when foreclosing on a home, but it has actually delayed the housing market's recovery in those states.
How much so? Take a look at these statistics:
Among homes that were foreclosed on during the third quarter of 2012, the national average was 382 days to complete the foreclosure process. For states with a judicial process, that average was closer to 500 days, and in New York and Florida, some foreclosures have taken longer than 3 years to clear because of the backlog of these types of cases at the courthouse!
The end result? States with a judicial process are taking longer to recover overall than their non-judicial counterparts.
When a lot of foreclosures occur in one specific area, the local housing market is flooded with inventory. This leads to a higher supply of homes than the demand for them, so prices drop off significantly.
But that’s only temporary.
When the prices drop, investors take notice of the opportunity to purchase several properties well below their market value, and typically, they come in and buy most of the foreclosures with hopes of reselling them once the market recovers. This leads to a lack of inventory, because prospective buyers looking to purchase a home as their primary residence have to outbid each other and the investors for homes.
The competition leads to bidding wars, which drives prices back up, and the housing market begins to recover.
In areas where lenders don't have to go to court, those foreclosed homes have already hit the market, investors have already come in, and this process has already begun. In many judicial states, we’re still waiting for this process to begin!
And, remember, one factor that realtors use to determine the health of a housing market is the number of months it would take to sell all of the available homes at the current sales rate. They consider a market with a six month supply as average, and in many states with a non-judicial foreclosure process, the rate is only 1-4 months. Because of the competition, homes are literally being sold only days after they are listed in these markets!
States like Arizona, Colorado, and California all have a non-judicial foreclosure process, and metropolitan areas within those states – like Phoenix, Denver, San Francisco, and San Diego – have all seen home prices surge 10-20% in the last year alone.
Meanwhile, New York, New Jersey, Illinois, and Florida have only experienced moderate increases in home prices because many of the foreclosures in these states are still navigating their way through the court process.
So, as you can see, the foreclosure process in your state can have a significant impact on how fast homes sell and how quickly the housing market recovers –even if your specific property isn’t (and never has been) a foreclosure!
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